Thursday, December 12, 2013

The Magical, Mystical Multiplier

In Tuesday’s Wall
Street Journal, the editorial, “How to Keep Workers Unemployed,” the
editors pointed out that reducing purchasing power for one set of persons for
the benefit of another set of persons does nothing to “create jobs.”

According to the figures quoted, the theory is that every dollar
of tax revenue used to pay jobless benefits creates $1.80 in economic growth.How this is done is a mystery — unless the
powers-that-be are looking at the hidden tax of inflation and considering the
rise in the price level as “economic growth.”

Inflation, however, is not economic growth.Inflation decreases individual consumption because each
dollar buys less than it did before.If
the new, inflated money is distributed to people who use it for consumption,
the whole thing is a wash, i.e., robbing
Peter to pay Paul, because aggregate consumption doesn't change — just the identity of the consumers.

Direct taxation does exactly the same thing.One dollar taken away from Citizen A and given to Citizen B
results in no increase in aggregate demand — and consumption demand drives the
demand for new capital, which in turn drives the demand for new jobs.

The result is that jobs are lost in some sectors due to decrease in demand, but jobs are created elsewhere in response to the increase in demand elsewhere — another wash. Of course, the overall effect is to decrease jobs, because the administrative costs associated with both inflation and direct taxation always diverts a measure of the demand to government.

Job creation in this manner actually results in a net decrease in jobs in the economy. Add in the effect of increasing wage costs as the price level continues to inflate, and jobs disappear at a faster rate as technology becomes a cheaper alternative to human labor, or lower wage costs overseas accelerate both capital flight and job transfer.

Harold Moulton described the effect of decreasing demand in order to finance economic growth in detail in his 1935
monograph, The Formation of Capital.It’s an eye-opener.